Microeconomics Tutorial 2

Section A: Multiple Choice Questions

1. A production possibilities curve illustrates
A. Scarcity

2. In a socialist economy, the economic problem of deciding what goods to produce is

solved by the
A. Government

3. The law of demand states that

A. Price and quantity demanded are inversely related

4. A ‘drop in the quantity demanded’ means that

c. price has raised and consumers therefore want to purchase less of the good

5. A ‘decrease in demand’ means that

A. The demand curve has shifted to the left

6. The horizontal summation of individual demand curves results in

C. a market demand curve

7. Which of the following pairs of goods would be most likely to be complements?

C. Mechanical pencil and leads

8. If good A is a normal good, decreases in income will

A. Shift the demand curve for good A leftward
 1. (a) Using a production possibilities frontier (PPF), explain the following concepts:
(i) Opportunity cost:
PC
f PC

0 TV TV
0
Straight line PPF Concave downward PPF
(Constant opportunity cost) (increasing opportunity cost)

(ii) Productive efficiency:

Q
0

- The point lie on PPF are productive efficiency.

- Productive efficiency mean maximum output is produced.
P

PPF2

PPF1

Q
0
 - If increase in resources or advance in technology, then the maximum output produced
and caused PPF shift outward.
(b) Using a production possibilities curve (PPC), explain the concept of ‘attainable’ and
‘unattainable’.

P
.F
A

.G
F
Q
0

Concave downward PPF

- Point G is attainable point, because point is located at attainable region.

- Point F is unattainable point, because point is located at unattainable region.

2.(a) List the three basic economic questions. Explain how capitalism and socialism system
solve these questions, respectively,
Socialism
 The government decided how the good will be produce.
 Government will have a large role in determining what will be produce.
 Government control over who get what good.
Capitalism
 The market will dictate what goods will be produced.
 Goods produced for those people who are willing and able to pay the prices for the
goods.
 Private producer decided how the good will be produce.
(i) What good will be produced?
(ii) How will the good be produced?
(iii) For whom will the good be produced?
2(b) (i) Productive inefficiency
P
A

B
C

Q
0
Point G is productive inefficiency because point fail to achieve maximum output.
 (ii) Discovery of new resources.

Growth of economic and in advance of technology will cause the PPF shift to the right.

3(a) Distinguish between a ‘change in demand’ and a ‘change in quantity demanded’.

Change in demand Change in quantity demanded
- A shift from one demand curve to - A movement along the same demand
another demand curve. curve.
- Caused by income, preferences, - Caused by the change in the price of
prices of related goods, number of the good itself.
buyers and expectations of future
prices.

(b) Distinguish between normal and inferior goods. Give an example for each of these two
types of goods.
Normal goods Inferior goods
- The demand of the good increase - The demand of the good decrease
when consumer income rises. when consumer income rises.
- The relationship between normal - The relationship between inferior
goods and income is positive, goods and income is negative,
- Starbuck coffee. - Nestle coffee.
4. (a) Define the law of demand.
- The price of a good rises, the quantity demanded of the good falls
- The price of a good falls, the quantity demanded of the good rises.
- Relationship between price and quantity demanded is negative

(b) Describe any FOUR (4) factors that cause an increase in the demand.
-Income. Increase in income.: increase in salary of a consumer. The consumer will have
many moneys to purchase.
- Price of related goods such as substitutes and complements. Increasing price of substitutes
goods.
- Number of buyers. Increasing in the number of buyers
-Expectation of future price. Consumer expect a price to be higher next month.

5 (a) Using appropriate diagrams, differentiate between ‘a change in demand’ and ‘a change
in quantity demanded’.
A change in demand A change in quantity demanded
Price
 Price
D1 D
D0
B
P1
P
P0 A

D1 D
D0 Quantity
Q1 Q2
Quantity demanded
demanded
- A shift in the demand curve - A movement from one point to
- Shift caused by other factors besides another point on the same curve
of the prices of the good itself such - Movement only caused by the
as income, price of related goods, change in price of the good itself
preferences, number of buyers, - When it is an increase of quantity
expectation of future prices demanded, it caused a point move
- When it is an increase in demand, it downward along the demand curve
causes a rightward shift in the - For example, when the price of good
demand curve. When it is a decrease increase from P0 to P1, the quantity
in demand, it causes a leftward shift demanded of good decrease from Q0
in the demand curve to Q1 and the point move upward
- For example, when people’s income from point A to point B.
increases from Q0 to Q1, the - Represent exact quantity of a good
demand curve shift to right from or service is demanded by
D0D0 to D1D1 at the same price consumers at a particular price.
- Defined as the willingness of buyer
and his affordability to pay the price
for the economic good or service

5 (b) curve is downward slopping

Price

P0 A

P1 B
0

P2 C

Quantity demanded
Q0 Q1 Q2
 - The demand curve is downward slopping because the law of diminishing marginal
utility and change in price of the goods
- The relationship between the price of a good and the quantity demand of that good is
negative
- When the price of a good decrease, the quantity demand of a good increase
- The law of diminishing marginal utility explain the utility or satisfaction gained by
consuming equal successive units of a good will decrease as the amount consumed
increase, individuals obtain less utility from additional units of a good. For example,
most utility is generated by the first unit of good consumed because it satisfies most
of the immediate need, second unit consumed would generate less utility, perhaps
even zero, because the consumer has less need. So, individual will only buy the good
with large quantity when its price down or promotion.
- Movement from point A to B shows that when the price of good falls form P0 to P1,
the quantity demanded of good increase from Q0 to Q1. The movement also can
explain as the people buy the good with large quantity when it is a promotion because
of less need.
6. Tomato sauce is a complement for hotdogs. Using relevant diagrams, explain what
happens to the market of tomato sauce and hotdogs if the price of tomato sauce rises.

Price Price
D0
D1

P1 B

P
P0 A

Quantity D0 Quantity
Q1 Q0 D1
demanded Q1 Q0 demanded

Diagram A: The price of tomato sauces rises Diagram B: Demand of hotdogs

- Complements mean the two goods that are use jointly in consumption
- The relationship between complements are negative, the demand for one fall as the
price of the other rises
- Diagram A showing the demand curve of tomato sauce. When the price of tomato
sauce rises from P0 to P1, the quantity demanded of tomato sauce will decrease from
Q0 to Q1 and cause a move upward of point along the demand curve from point A to
point B.
- Diagram B showing the demand curve from point A to point B
- Diagram B showing the demand curve of hotdogs in the market. Due to the price
rising of tomato sauce in the market, as tomato sauce is a complement of hotdogs, the
demand of hotdogs will decrease. It causes the quantity demand of hotdogs decrease
from Q0 to Q1 and demand curve of hotdogs shift leftward from D0D0 to D1D1 at
the same market price
- Overall, the demand of tomato sauces and hotdogs will decrease when the price of
tomato sauces rises.